Cash or Finance

Sept. 28, 2010


A Hypothetical Example<

A Hypothetical Example

  • One concrete pump, on the books for the foreseeable future
  • New efficiency frees workers previously required — status?
Lease financing
  • One concrete pump, flexibility to upgrade to better, faster technology
  • New efficiency frees workers previously required for pouring
  • Low monthly cost enables lease of second pump, with freed workers to operate
  • Capacity and productivity doubled without major increase in overhead
  • Capital preserved for other business needs

A contractor friend of mine recently made a purchasing decision on a new truck-mounted boom pump. "It's going to make us a lot faster and more efficient," he explains enthusiastically. How's he going to pay for it? "We have the cash. We're going to buy it and we're done. No bills to pay." A logical approach — and the way many in the industry have traditionally handled the acquisition of new equipment: if we can afford the purchase price: go. If not: wait until we can.

It's a testament to your success and business smarts if you have cash to pay for a significant piece of new equipment. But in today's fast-moving, super-competitive markets, is a substantial cash purchase the best way to sustain your success? Surprisingly, the answer is not as clear-cut as you might have thought.

Unlike five or 10 years ago, today's critical growth drivers are the ability to respond lightning fast to new opportunities — and creatively leverage your resources in ways that continuously build speed, quality and productivity into your operations. That, in turn, helps increase new capacity, customer satisfaction and positive word of mouth.

So what's the best way to acquire new equipment? To help you evaluate your choices, we looked at the three most common payment methods in the concrete industry — available cash, a loan or lease financing.

How's It Look on Your Books?

With a cash purchase or loan, you own the equipment and it's on your books as an asset. On the positive side, ownership typically eliminates additional payments until the warranty expires. However, you have less financial and competitive flexibility — if you suddenly need a new piece of equipment; new technology is introduced that offers major competitive advantages; or you face an unfunded business emergency. A bank loan reduces available credit, also limiting your ability to respond quickly to unplanned events.

In a typical lease agreement, you don't own the equipment, which frees up capital and does not affect available credit. The equipment may not be considered an asset on your books and the monthly payments are often deductible.

Follow the Technology

Technology has become an increasingly important factor in determining the most sensible payment method:

  • How technology-driven is the equipment you intend to acquire?
  • How quickly are features and benefits improving in that category?
  • Will it help you complete jobs faster, with fewer resources? Make you more cost efficient? Improve your quality?
  • Can you quickly translate those benefits (faster, cheaper, better) to your customers to catch up to or pass competitors in your market?
  • Can the technology help you improve working conditions, worker safety and environmental compliance?

Tom Ade, long-time financing expert in the construction industry and general manager of the Construction Finance unit at GE Capital Solutions comments that "equipment with technology that is improving every two to three years or less — in ways that can impact your business performance and customer satisfaction — is the most logical choice for lease financing." Monthly payments are typically low and you can also bundle in additional elements such as accessories, freight and warranty coverage.

Perhaps most importantly, unlike ownership, you have the built-in flexibility during the lease to quickly upgrade to newer equipment to take advantage of potential competitive opportunities. You may even find that you are paying less each month, even though you've upgraded to better and faster equipment, thanks to the increasing cost efficiency of most technology.

Ownership or Usage?

For many of us, like my contractor friend, it's important to own equipment (via cash or loan) vs. just paying to use it (via lease financing). Having an emotional attachment to a home or a hot car is understandable. But to a concrete pump? Usage of that pump, not ownership, is what brings in revenue, increases your operating efficiency and builds customer satisfaction. So why own it, especially if the technology is constantly improving?

Paying for usage also enables you to avoid risks of ownership. If the equipment becomes obsolete, you're stuck with an asset with limited value in the market and to your business — and the purchase may have exhausted the capital you now need to replace it. Also, once the warranty expires, repair expenses can be considerable. Lease financing often provides the flexibility to upgrade as technology changes, so your equipment is never obsolete. Or, at the end of the lease term, you can return it without further obligation.

"In a business downturn, owned equipment can become a liability," adds Tom Ade, "since you may no longer have valuable capital you need to weather an unfavorable economy." Affordable monthly lease payments allow you to set aside capital to insulate against downturns — and may put you in the enviable position to take advantage of market opportunities your competitors do not have the financial flexibility to respond to.

Summary: Leveraging Your Resources for Growth

Many are surprised to hear that most Fortune 500 corporations use leasing as a means to equipment purchases — even when they can easily pay cash —because lease financing is a effective tool for enhancing their productivity and operating performance.

  • Put equipment and technology you need to work right away. Monthly financing payments can be handled through existing cash flow and do not require the substantial capital outlay and approval time of an outright purchase.
  • Pay for usage, not ownership. Usage, not ownership, is what pays the bills and builds customer loyalty, referrals and growth. Ownership of technology-driven items just doesn't make sense today.
  • Have guaranteed upgrade opportunities. A purchase is on the books and may tie up your borrowing capacity for years. You can upgrade or add new leased equipment, as your needs and technology change.
  • Increase your operational flexibility. A lease's off-balance-sheet treatment can improve your ability to obtain bonding, doesn't reduce your borrowing power and can optimize the value of available tax benefits.
  • Build capacity, competitive advantage and productivity. With affordable access to the latest tools and technology, you can produce and deliver faster, expand capacity and handle more work with the same or less overhead.

While a cash purchase may be your first inclination the next time you need equipment, it makes solid business sense to weigh your options and consider lease financing — for purchasing power, flexibility and security you can use to make immediate, game-changing improvements in your business operations and build a foundation for sustained business growth.